Apple Calls NBC's Digital Download Bluff

Includes: AAPL, GE
by: Yankee Group

By Carl Howe

Friday we got news that NBC (NYSE:GE) was planning to not to renew Apple's (NASDAQ:AAPL) distribution of its TV shows via the iTunes Store, but there was always the possibility they might negotiate a new deal by December. Well, Apple has decided to call NBC's bluff by publicizing the terms of disagreement in a press release:

CUPERTINO, California—August 31, 2007—Apple® today announced that it will not be selling NBC television shows for the upcoming television season on its online iTunes® Store ( The move follows NBC’s decision to not renew its agreement with iTunes after Apple declined to pay more than double the wholesale price for each NBC TV episode, which would have resulted in the retail price to consumers increasing to $4.99 per episode from the current $1.99. ABC, CBS, FOX and The CW, along with more than 50 cable networks, are signed up to sell TV shows from their upcoming season on iTunes at $1.99 per episode.

“We are disappointed to see NBC leave iTunes because we would not agree to their dramatic price increase,” said Eddy Cue, Apple’s vice president of iTunes. “We hope they will change their minds and offer their TV shows to the tens of millions of iTunes customers.”

Apple’s agreement with NBC ends in December. Since NBC would withdraw their shows in the middle of the television season, Apple has decided to not offer NBC TV shows for the upcoming television season beginning in September. NBC supplied iTunes with three of its 10 best selling TV shows last season, accounting for 30 percent of iTunes TV show sales.

I don't know about you, but to me, that sounds like a very good call on Apple's part. Would you pay $5 -- half the price of a feature movie -- for an episode of a TV show? I sure wouldn't. Heck, I can rent the entire season on DVD from my local blockbuster for $10.

But Apple didn't leave it there. To avoid disappointing subscribers who wanted complete season sets, it is cutting NBC's fall season from the iTunes store in September instead of January when the contract expires. Apple's saying to NBC, "OK, explain to your board why you just gave up $20 million a year [my estimate] in very-low-cost digital revenue that you now have to make up in advertising sales." Personally, I'd love to hear the answer to that one.

Every business thinks they can be a destination on the Internet, but the reality is that consumers only have so much time available to hunt down content they want; it's just the tyranny of too much content. If convenience didn't trump most other marketing factors, we'd have no convenience stores. Yet network execs are still fighting to believe that they can be THE portal to digital content -- despite the fact Apple is five years and a multi-billion-dollar business ahead of them in establishing that beachhead with iTunes. And we'll ignore the issue that the only way to get video onto the best-selling portable video players and the hottest cell phones in the world is through Apple.

NBC put down a $20 million bet on a bad hand. Apple just called, knowing that even if it loses, it has a $2 billion a year iTunes business bankroll to keep playing with. Want to bet who wins the match?

Update: I think this screenshot nicely sums up the new fees and distribution system NBC TV shows will be using this fall now that those shows won't be carried on iTunes. For anyone whose read the comments on various postings about the NBC/Apple spat, it's been interesting to see how many people have been saying, "Well, whatever -- I'll just BitTorrent the episodes instead of buying them." That was exactly the situation in the music business before Apple provided a legal alternative for music downloads; it may be that we're about to see a big boost for network TV file-sharing -- without any compensation to NBC.

Full disclosure: The author owns Apple stock.

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